Should I Purchase a Rental Property?

Investing in Real Estate can make terrific sense, but as in all investment strategies – there is some inherent risk…

Here is a brief summary of things to consider when purchasing a rental property:

  • Personal Finance considerations: Lenders typically require 25% down on an investment property mortgage (caveat -if part of the rental property is your primary home – as in a duplex where you live in one unit and rent the other unit out, loan programs such as FHA with as little as 3.5% down are available).  Interest rates will also be higher than the rate available on a primary residential mortgage.  Your credit, income, assets and debt ratios all factor in on the interest rate offered.  As with all mortgages, closing costs will be associated (plan on 3% of the loan amount).   It’s wise to have a large “nest egg” saved up to cover vacancy loss, improvements and repair costs.  Money desperation can facilitate unwise decisions in accepting “risky” renters – leading to serious money woes.
  • Personality considerations: Ask yourself, “Do I want to be a Landlord?”  Landlords have to screen for tenants.   Will you be able to say “No” when you need to?  Will you be able to be firm about collecting rent?  How do you feel about doing/ or hiring out repair work?  Using a property management company is a very good option (one I recommend) if you don’t want to be a landlord.  Most management companies charge around 10% of the rental income (becoming another financial consideration).
  • Property considerations: Budget will dictate some things, but when evaluating properties consider the neighborhood and associated demographics.  Properties near the university are in high demand (low vacancy), and often can glean higher rents (depending on the condition of the property), but also may have higher turn-over and more repair costs.  A single family home near a school may provide more rental stability and lower turnover once rented but may be harder to rent initially.  The age, size, condition, location and amenities (garage, laundry, yard etc…) of the property will influence potential rental income as well as the potential outlay for maintenance.
  • Investment considerations: Return on investment (ROI) a profitability measure that evaluates the performance of a business by dividing net profit by net worth,   cash flow Income less expenses, risk, and tax implications are all important aspects of investment considerations.   

Cash flow example:  

                     1900 sq. ft, 3BR, 2 BA single family home in North Logan

                     $160,000 (negotiated seller paid closing costs $4800)

                     25% down            $40,000 

                     Loan                      $120,000 @ 4.75% interest

          Payments             $626 + $100 per month tax & insurance = $726/mo

         Potential rent      $1150/mo – less 10% management fee =    $1035/mo

         Gross monthly cash flow:   $309   ($3708 per year)

                                  9.27% ROI, excluding vacancy loss & repairs – (an unknown)   

Additional tax advantages & appreciation of the asset (Real Estate has traditionally appreciated at a rate of 3 -4% per year, although we all know this is not a fail safe assumption) May make this purchase a very desirable investment decision.                                                     

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Home buyers – the sequence is significant!

Jan 2014

This happens frequently… I get a call on the phone, a nice someone says “my friend said you’re a good Realtor…  I saw a house I like in Logan – can you show it to me?”  I absolutely love a call like this – because there are few things more satisfying than helping someone find a great home.  BUT…there are a few steps that should be taken BEFORE we go out & look at homes.  Just as successful baking (following a recipe) often has sequential ramifications, home buying goes much more smoothly if things are performed in a certain order.  It should go something like this:

1) Find a Realtor – that you trust, is attentive,  knowledgeable and that you won’t mind spending time with. (Check references). Make sure the Realtor is someone who will have your best interests in mind, and then please be loyal to them in return.  Realtors receive no compensation until  a transaction (home sale or purchase) is successfully completed.

2) Get pre-approved for a loan with a lender who is competent, qualified & knowledgeable! Once again, check references… there are many loan programs, find out which one will be the best for your situation.  If you need to wait a while & save up some more money or get rid of some debt in order to obtain a loan with more favorable terms… do it!  A good lender will give you direction.  Either you or your lender need to let your Realtor know what loan program you will be using.  FHA loans have certain guidelines – not all houses will qualify for that type of loan.  USDA loans have geographic parameters – so if you are getting a USDA loan, you need to look at homes only in certain areas.. (In Cache Valley, homes in North Logan, Logan, River Heights, Providence, and parts of Nibley will NOT qualify for a USDA loan).  

If you have CASH to buy a home, you may ignore step two – and go straight to looking at homes!  You’ll also have additional negotiation power:-)

3)  Now that you know your budget, know your loan parameters, have your pre-approval letter and you have the ability to act when you find the home that “trips your trigger”   IT’S TIME TO LOOK AT HOMES!  When you find a home/homes that you want to see, please let your Realtor know  a day in advance if possible.  Showings need to be scheduled with the sellers who often need ample notice to get the home ready and find a place to go while you’re there.  It also makes sense to be able to schedule showings logistically – saving time, gas & air quality.

When these steps are performed out of order, sellers are inconvenienced needlessly  ( getting their homes in order for showings – often dragging children away from dinner, homework etc… – not to mention the emotional drag of getting their hopes up) and the buyers themselves waste time & emotional turmoil looking when they may not be in the position to buy.

If you discover you’re not quite financially ready to purchase, but you really have the hankering to look at homes,  spend time looking at properties online (your Realtor will send you properties to view if you’d like to have things filtered & only look at what fits your guidelines), and by all means attend open houses.

Happy Buying!

What are the odds?

Real Estate transactions – whether purchasing or selling – are stressful because there are so many uncertainties…It really is a game of numbers.

People worry:  What if my home sells and I cant find another? Will it close – on time?  Should I pack now?  What if I move out and buy/rent another place & the deal fails?  When should I schedule the movers – take time off work?   ???

Lets look at some of the ways to make odds of a successful transaction favorable :

  • Dependable, competent people are involved in the transaction – a dependable Realtor (s),  competent lender,  thorough inspector, a good escrow officer.
  • Buyers are pre-approved with that competent lender BEFORE an offer is made.
  • The home is maintained – if possible, repairs are made BEFORE it is put on the market and an offer is accepted.
  • Communication between All parties is frequent and clear.

Even with high odds of a successful Real Estate transaction, deals do sometimes fail… Tragedies can befall one of the parties – people become ill,  die, lose a job, etc…  Interest rates can rise dramatically within the escrow period and buyers no longer qualify for the loan.  Something terrible can happen to the home before closing – fire, flood, lightening, vandalism etc… Bad things can happen, but odds are they won’t.

If the right people are involved, and the right steps taken, odds are that the deal will close, and close on time.